Management 587 Case/Assignment/Summary Activity Name Texas A&M-Commerce In partial fulfillment of the requirements for MGT 587 Professor Lloyd M. Basham June 8, 2014 (The above [and the next 3 lines] starting with \"In partial fulfillment.....\" may be single spaced). Table of Contents Page Abstract or Introduction 3 Statement of the Problem (or whatever the next topic is) 4 (And so forth for each major topic subject area) References (Whatever the page #) Appendix (Whatever the page #) (Every line entry is double spaced) (Please note special use of page number at center of page for Table of Contents at the bottom of this page.) ii 3 Abstract or Introduction (This is not necessarily a page long but is usually a paragraph or two; in some cases for very in depth papers and/or reports the Abstract or Introduction may be greater than a page. Its purpose is to concisely tell the reader what is the paper/report about). THIS IS YOUR FIRST PAGE OF TEXT THAT IS COUNTED TOWARD THE MINIMUM TOTAL OF PAGES REQUIRED FOR THE ASSIGNMENT (Margins are 1'' from the top and bottom and left and right. So the text of the body of the paper appears to be well uniform \"inside a box or rectangle, if you will. In addition please remember the font that is listed in the syllabus). (Also everything is double spaced) (Please note the numbering of the pages) 4 Statement of the Problem or whatever the next subject/topic is (This is usually the first full page of text). (Also the beginning of the paragraph is indented - not flush with the margins as internet text is) (Use the centering of the page to list the major heading as the particular part of the assignment, i.e. Conceptual Assignment; Personal Application and Contemporary or Controversial Project). All text included in the paper have the below standards and requirements. PLEASE GIVE REFERENCE SOURCE CREDIT. SEE APA, EDITION 5 AS TO PROPER USE OF REFERENCING IN THE BODY OF THE PAPER. Academic Honesty Academic honesty is highly valued at the Texas A & M University - Commerce. You must always submit work that represents your original words or ideas. If any words or ideas used in a class posting or assignment submission do not represent your original words or ideas, you must cite all relevant sources and make clear the extent to which such sources were used. Words or ideas that require citation include, but are not limited to, all hard copy or electronic publications, whether copyrighted or not, and all verbal or visual communication when the content of such communication clearly originates from an identifiable source. Please see the Texas A & M University - Commerce Graduate Catalog for more information about academic honesty, including consequences of academic dishonesty. (Whatever page # that is for the Reference page after the body of the report) References Gous, M. (2003). Leadership in support of learning for an unknown future. Paper presented at the HERTDSA 2003 conference. Retrieved March 26, 2005, from http://surveys.canterbury.ac.nz/herdsa03/pdfsnon/N1071.pdf. Knight, P., & Trowler, P. (2001). Departmental leadership in higher education. Buckingham England: SRHE/Open University Press. Kouzes, J.M., & Posner, B.Z. (2003). The leadership challenge. In J.Kouzes & B. Posner (Eds.), Enlist Others (pp. 153). San Francisco: Jossey-Bass. (Please note the following: Centering of the word Reference for the Reference page The author of the reference is entered first and is \"left justified\" Each entry is double spaced Above is examples of references from 1. the internet, 2. article in journal, and 3. a book. Examples of other types of references are in APA, 5th edition. ? Appendices (or the Word Appendix if one only has one appendix on the next page). (Note the centering of the page for the title Appendices). Also, note the centering at the bottom of the page for the page number) 12 (Whatever next sequential number of page should be) 13 APPENDIX A (Following listing of Appendix should continue with alpha B, C. etc.) (Note that the paging goes back to right corner). Typically this is the section for tables, graphs, and illustrations that contain quantitative data.. Why Your Next CEO Should Come from Inside by Steven Wheeler 12/11/07 Harvard Business School professor Joseph L. Bower believes that only home-grown leaders have the sense of history and respect for culture to bring companies through major transitions. But not every insider is up to the job. Although the tenure of a chief executive may last anywhere from one to 20 years in large global corporations, the first few years, Joseph L. Bower suggests, are crucial in setting a new direction. In his new book, The CEO Within: Why Inside Outsiders Are the Key to Succession Planning (Harvard Business School Press, 2007), he says that to drive strategic change, a CEO needs to understand the company's capabilities and the major forces affecting it. There aren't years to figure out where the world is headed. (This sense of urgency fits with Booz Allen Hamilton's annual study of CEO succession, which finds the average CEO tenure is just under eight years.) How can companies best ensure that they will put the most qualified person in the top job to hit the ground running? Based on more than 40 years of experience and study of boardroom and executive suite dynamics, Bower, the Donald Kirk David Professor of Business Administration at Harvard Business School, shows that insiders often miss the need for fundamental change whereas outside candidates although they may bring fresh perspective lack the knowledge of the company's people, technology, competitiveness, and culture that are crucial for success. The answer lies in cultivating Inside Outsiders individuals with a deep understanding of the company who aren't afraid to question the status quo. Bower sat down with Booz Allen Hamilton Senior Vice President Steven Wheeler in the firm's New York offices in November to discuss his recommendations for effective succession management. S+B: How does CEO succession reflect a company's culture and the discipline with which it is managed? BOWER: For a departing CEO, the natural tendency when you're thinking about your successor is to look inside. These are the people you know. They know the business, the organization, and its people. You want to reward them because they've helped you. These are all good criteria for judging an individual, but they don't add up to an appropriate way for a company to manage succession. Instead, the incumbent CEO and the board have to consider several key questions: Where is the business headed? What challenges does it face? Has the company developed a cohort of potential leaders so that when it comes to decide which insider wins the race, it is clear that the winner is talented enough to lead in the future, not just better than the other candidates? Managing a succession well means managing your company so that people who are moving up in the organization are constantly learning to lead, and are consistently being groomed. This is a central theme of my book: Succession is a process rather than an event. The ingredients of a succession process involve thoughtful recruiting and assignments that test managers, build strengths, and expose weaknesses. There must be very careful, regular evaluation and feedback that is fair and transparent. And all that takes a lot of discipline. We know of some giant \"people factories\" like GE that do this kind of executive development well, but all companies can manage for talent development if they are willing to invest. One US$2 billion company on whose board I sit has a \"talent war room,\" with the management organization of each of the company's businesses arrayed around the walls. Each manager's potential and performance is written on a card, which is attached to the wall with magnets so it can be moved. They color code the rankings, so that it is easy to see by division who is ready to advance, and who is not performing. This room enables comprehensive reviews of the talent that is available, and the talent that is still needed. It demonstrates that the leaders of this company are willing to invest the time and effort to think practically about the company's future. S+B: Who are the \"Inside Outsiders\" of your book's subtitle? BOWER: Inside Outsiders are managers who have \"grown up,\" professionally, at the company, who have developed an intimate understanding of its strengths and weaknesses, and who respect its culture. Yet they have also managed to remain objective about the company and skeptical of any self-serving ideology. That means they are willing and able to question the received wisdom. They are clear about the need for real change. Jack Welch is an excellent example of an Inside Outsider. He had spent his career at GE and had earned a reputation as a strong and effective manager, and yet because of his education (he earned a Ph.D. in chemical engineering), his background building GE's plastics business (not in GE's core), and his assertive manner, he perceived himself and was generally perceived by others as a maverick. But his unique perspective enabled Welch, within the first few years of his new role, to take apart much of the staff and systems that his predecessor had put in place. Welch is perceived as very aggressive, and his efforts were transforming, but he did it in a way that worked for General Electric. He is famous for demanding that every GE business be number one or number two in market share. If not, the company would \"fix it, sell it, or shut it down.\" In a metric-driven company like GE, that simple directive provided clear guidance for business leaders. And they responded. During his 20-year tenure as CEO, GE's market cap grew by 6,000 percent. When Edwin Artzt, in the early 1990s, tried to change Procter & Gamble in the way that Welch did at GE (Artzt's efforts included a restructuring that closed one-fifth of P&G's factories and dropped 13,000 people), it didn't work. I've been told that his methods just didn't fit P&G's way of doing things. One manager told me, \"He knew what had to be done, but [despite a career at the company] he came at it as an outsider.\" This is the counter case: an insider who knew what needed to be changed, like Welch, but who failed because he couldn't do it in a way that exploited the strengths of the culture. S+B: How can a company identify and develop potential Inside Outsiders? BOWER: I think a central dilemma in managing succession is that the insiders tend to buy into the underlying premises of the existing strategy in the deepest way. They may not even be conscious of it, but it's part of their DNA. This can be crippling, because it prevents them from seeing the need for change. And yet if you have a disciplined process of talent development the potential is there for some of the insiders to be groomed into truly outstanding CEO candidates. It's not that hard to identify these potential Inside Outsiders. But it is hard to develop them into great leaders and to retain them in the organization. The first thing you look for is intellectual integrity. You need someone who is willing to confront all situations, even the disagreeable ones. That's pretty rare. You don't necessarily want a maverick, but you want someone tough enough to face facts and speak out about them effectively. For example, [former American Express CEO] Harvey Golub says that the first time he recognized Ken Chenault's potential to become his successor was during a discussion that Golub was having with senior executives about problems the company was facing. Chenault was the only one to stand up and lay out the issues despite his immediate bosses' wishes. He demonstrated integrity and courage, and Golub took notice. But to be great leaders, executives need to go beyond diagnosing what's wrong. These leaders have to really understand what's feasible given the people that they have. They will be called upon to initiate change and manage risk by pushing and stretching their people, but not breaking them, not fomenting a revolution, and not leading people to do things that are destructive. It's fascinating to watch a significant organizational change unfold. From the outside, the process looks like revolution. But the leaders themselves move cautiously, trying hard not to lose their organization's trust. Later, looking back, they often conclude that they were too cautious that they could have been bolder still. When our students [at Harvard Business School] asked Jack Welch what his biggest mistake was at GE, his response was, \"I didn't move fast enough.\" And yet at the time, most observers felt he moved at breathtaking speed. Part of these leaders' effectiveness comes from being mentored well. Often, when you're young, you don't know how to challenge the status quo. You just get everybody angry. You're regarded as a Cassandra or not a team player. Building Insider Outsiders requires an enormous investment of money, time, and patience especially of the incumbent CEO. Mentors need to recognize when a young executive has an unusual, objective perspective, and should encourage and nurture this quality over time through a carefully chosen sequence of assignments that builds and tests a wide range of capabilities. S+B: In your book, you talk about the need for \"creative abrasion,\" and you also say that one key criterion is competitiveness. How do you strike a balance between competition and teamwork? BOWER: I think part of it is asking, competitive against whom? With whom? I didn't become an effective leader until I learned to stop competing with my peers. Some managers have to learn that their job is to compete with external competitors, and that the way you do that best is to help your peers succeed. I think one of the reasons athletes from team sports do relatively well in business is that they've learned that. They know that you don't get to lead without knowing how to work with others. The other day I was listening to the [New England] Patriots players interviewed after they beat the [Indianapolis] Colts. They all sounded like coach Bill Belichick. \"Oh, it's a great team.\" Not one of them took personal credit. Leaders need to manage the planning and budgeting processes so that these become opportunities for rising executives to learn how to review and develop strategy. These are also occasions to look at new businesses that help executives see it's possible to think differently. Sometimes that requires bringing in diverse kinds of people. We have a wonderful case on a woman at IBM who was given the job of building the company's network technologies business. She took it to $3 billion in two years. She was a very different kind of person from what IBM was used to, although she was an insider. But they were clever enough to give her that responsibility and to mentor her well, and she learned a lot in the process. And so did the company. The employee in this case assembled a team of people just like her to grow the business quickly. Yet later she had to bring in exactly the sort of person that she had left out, but who knew how to manage complex processes. And she talks about learning how effective it was how problems suddenly disappeared because the new person brought order where there was unnecessary chaos. One professor at Harvard Business School refers to the benefits that come from the interaction of different skill sets and personalities as \"creative abrasion.\" Great leaders understand that there is strength in recruiting for diversity so that teams of insiders never get a monolithic view of things. The melding of those different perspectives drives creativity. S+B: Given the news events of the last few weeks in particular and the turnover in financial services, what can we learn from the recent run of sudden successions? And what can we glean that's not obvious? BOWER: Based on press accounts of Merrill Lynch and Citigroup, I would say that we have very large, complex organizations now operating in the financial sector. They are tremendous in scale and scope. The job of running them is immense. These institutions are under enormous pressure to perform short term. Managing the balance between short-term performance and risk management and building for the long term is complex, and is probably beyond what one individual can fully oversee as CEO. There need to be teams working together that can discuss all the dimensions of the problems facing the firm. It certainly seems in this instance, in both cases, that risk management really broke down. And it's not clear to what extent the teams were working to control that process. We appear to have firms that were focusing mostly on delivering results. Merrill's drive for profits and Citigroup's immediate need to deal with scandal seem to have taken priority over long-term risk management. When we look around, we can see that, apparently, most financial institutions have some garbage on their balance sheets. The ones that are getting hurt are those that didn't recognize that early enough and start hedging against it. It's discouraging that, at each of these companies, when the board of directors decided the circumstances required changing the CEO, there were no obvious inside candidates to choose. That is the dilemma facing companies that haven't thought enough, in advance, about developing the executive talent they will need. Author Profiles: Steven Wheeler (wheeler_steven@bah.com) is a senior vice president with Booz Allen Hamilton based in Cleveland, Ohio. He leads the firm's work focused on strategic leadership and has served multiple industries with a focus on consumer packaged goods and durables. CEO Succession 2007: The Performance Paradox by Per-Ola Karlsson, Gary L. Neilson, and Juan Carlos Webster The news this year is that even those chief executives who deliver subpar returns are showing unexpected staying power. One of today's most pervasive criticisms of corporate behavior is that boards of directors are driven above all else by the stock market's demands for short-term gains. As a result, they don't give chief executive officers enough time to develop and implement long-term strategies that will drive sustained performance. New CEOs, the story goes, have two years to boost earnings per share three if they're lucky before their impatient boards give them the ax. Illustration by Ross MacDonald The problem with this story is that it's not true. The facts, revealed this year by Booz & Company's annual study of CEO turnover at the world's largest companies, suggest the opposite. To be sure, corporate boards have indeed become somewhat more likely to dismiss their chief executives since 2000 than in the previous decade. But there is no evidence that those boards are moving hastily to fire CEOs because of poor shortterm results, according to our analysis of 10 years' worth of data. In fact, we find that even the worstperforming CEOs face a low probability of being forced from office in the short term. Rather, the uptick in dismissals is due largely to an increase in board struggles. Our current study of CEO turnover includes data for the world's largest 2,500 public companies for 10 full years 1995, 1998, and 2000 through 2007. This year's data shows a continuation of many of the trends that emerged earlier in this decade. For example, the overall rate of CEO turnover which includes planned successions, dismissals, and merger-related departures was 13.8 percent in 2007, compared with 14.3 percent the year before. This slight decrease carries on a downward trend in turnover from the high in 2005 of 15.4 percent. Separately, we found that boards continue to dismiss CEOs at a higher rate in the 2000s than in the 1990s: In 2007, the global rate of CEO dismissals due to poor performance or to boardroom disagreements was 4.2 percent. This is well above the rates we observed in the 1990s, but near the average for this decade. Further investigation this year, however, shows that boards have not been moving to dismiss those CEOs who deliver poor stock-price performance. Using detailed data on total shareholder returns and CEO tenure from all 10 years, we performed a comprehensive analysis of our database to ascertain for the first time whether there is any statistical relationship between substandard stock-price performance and the likelihood of a CEO's dismissal. For all CEOs, the likelihood of being dismissed for poor performance in a given year is only 2.1 percent. Given this data, it is not surprising that the correlation between stock performance and dismissal is generally not significant. Indeed, the very worst-performing chief executives those in the bottom decile, whose companies' two-year stock price had fallen by 25 percent in absolute terms and whose companies had underperformed their regional industry peers by 45 percent had only a 5.7 percent probability of termination. The data on CEO tenure also supports our conclusion about the probability of dismissal for poor performance. If boards were increasingly replacing CEOs after two or three years of poor performance, we would see the median tenure declining. Our earlier studies found some evidence that seemed to support the hypothesis of rapid CEO replacement. However, this year, additional analysis across the full data set shows that there has been no trend toward quicker dismissal of CEOs over time. The median tenure for a CEO who left office in 2007 was 6.0 years, the same as in 1995 and the same as the average over the 10 years of our study. Our finding of the limited correlation between shareholder performance and dismissals suggests that boards are giving underperforming CEOs more latitude than might be expected possibly, we hypothesize, because boards lack a suitable pool of internal replacement candidates. We also found that CEOs recruited from outside the company continue to consistently underperform insiders and to make up a significant share of the departing CEO class. Moreover, we have found many North American companies continue to pursue CEO succession practices that seem questionable. In short, our research suggests that there is substantial scope for improvement in the way companies oversee chief executives, plan for successions, and develop pools of top leadership talent. Among the specific findings for 2007: Overall turnover is down. At 13.8 percent in 2007, total chief executive turnover continues to fall from its high of 15.4 percent in 2005. The 2007 rate is the lowest since 2003. The slight downturn from the previous year's rate of 14.3 percent can be attributed to small decreases in the global rate of both merger-related and forced turnovers. Forced succession rates have stabilized. In 2007, 4.2 percent of CEOs were dismissed. This is a much higher rate than the 1.1 to 2.0 percent prevalent in the 1990s, but only slightly above the average of 3.8 percent in the 2000s. We attribute this increase to the legislative and regulatory reaction to corporate scandals, the rise of the corporate governance movement, and the increasing activism of institutional shareholders. Europe leads in turnover. At 17.6 percent in 2007, the overall succession rate for European CEOs was significantly higher than for their North American counterparts. This can be attributed largely to a planned succession rate of 8.3 percent. Boardroom infighting remains high. Board disputes and power struggles have accounted for more than one-third of all CEO dismissals since 2004, up from less than a quarter prior to that. Succession patterns vary by region. The U.S. continues to favor a governance model in which the CEO also serves as chairman of the board. New North American CEOs often begin as \"apprentices,\" meaning that the outgoing CEO remains on the board as chairman. In Japan, outgoing CEOs always become chairman, but the role is mostly ceremonial. In Europe, few CEOs hold the chairman title, and the apprenticeship model is much less common. A CEO who is also chairman is more secure than one who is not. Globally, of all CEOs departing in 2007 who never held the title of chairman, half were forced to leave, compared with 34 percent of those who held the title of chairman at the end of their tenure, and only 26 percent of those who held the title of chairman at the start of their tenure. In North America, the disparity was even greater. The \"two-year rule\" is a fallacy. Contrary to the conventional wisdom, few CEOs face dismissal after two or three years of poor stock-price performance. Even CEOs whose companies' stock price has fallen 25 percent in absolute terms and 45 percent relative to regional industry peers after two years face only a 5.7 percent probability of dismissal in the next year. Boards still opt for outsiders; outsiders continue to underperform. More than 20 percent of all CEOs are brought in from outside the company, despite the fact that in North America and Europe, outsiders, on average, underperform insiders. For all 10 years studied, companies headed by North American outsider CEOs underperformed regional market returns by 1.0 percent on average, and the gap for European outsiders was 2.2 percent. Many of the trends in CEO turnover have stabilized over the seven iterations of the Booz & Company study. The total turnover rate, which includes planned successions (due to retirement, illness, death, or longexpected changes), merger-related successions, and forced successions, reached a high point of 15.4 percent in 2005, and fell to 14.3 percent in 2006. (See Exhibit 1.) This year's drop to 13.8 percent is less sharp, confirming our prediction in 2005 that we had crested the wave but that an ongoing high rate of succession was likely to be the norm. The rate of planned successions was 6.8 percent in 2007, just over its average for the years we have studied. At 2.8 percent, merger-related successions were down slightly from a cyclical high in 2006 of 3.2 percent. (We use press reports, public filings, and the companies' public statements to classify each departure as planned, merger-related, or forced. For more information on the data, see \"Methodology,\" below.) Regional Disparities Europe led the world in CEO turnover in 2007, with an overall rate of 17.6 percent, compared with 15.2 percent in North America, 10.6 percent in Japan, and 9.1 percent in the rest of the world. (See Exhibit 2.) Boards of directors in Europe are more likely to dismiss their CEOs: The rate of forced successions at European companies in 2007 was 5.8 percent, compared with 4.3 percent in North America. The average share of departing CEOs who were forced out over the entire 10 years of data we have studied underscores Europe's position as the toughest environment for chief executives: 37 percent of all European successions were forced, compared with 27 percent in North America. In Japan, where forced successions are not customary, the 10-year average was 12 percent. The higher incidence of CEO dismissals at European companies most likely reflects the impact of the corporate governance reforms enacted since the late 1990s by many countries, including France, Germany, Italy, the Netherlands, and the United Kingdom. We hypothesize that the cumulative result of these reforms has been a shift of power from CEOs to boards of directors and shareholders, and that the reforms have led boards to become more proactive about risk management and therefore more likely to depose a CEO when they perceive potential liability. Shareholders have also seemed to be more likely to join with supervisory boards, unions, and politicians in subjecting CEOs to greater scrutiny than they received in the past. Another reason for the difference in European and North American rates of CEO dismissal may be their different CEO governance models. One important distinction is whether or not the CEO also serves as chairman of the board. In Europe, only 16.5 percent of CEOs leaving office in 2007 held both titles during their careers; in North America, nearly 75 percent did. A combined CEO-chairman is less likely to be dismissed. In North America (where U.S. companies dominate the data), for CEOs departing in 2007, the difference was pronounced: Only 28 percent who had held the chairman title from the start of their tenure were dismissed (that is, forced out), as were 33 percent who had been granted the title later; the forced dismissal rate for CEOs who had never held the title, however, was 57 percent. (See Exhibit 3.) In North America, the combined CEO-chairman model persists despite long-standing recommendations from governance reformers that companies split the CEO and chairman roles. Instead, U.S. boards in particular have largely preferred to name one of the independent directors \"lead director\" to counterbalance the CEO. Stock-price performance data does not favor one model over the other; however, the median tenure of CEOs who have never been chairman is consistently shorter. (See Exhibit 4.) In Europe, the low number of CEOs who hold both titles reflects established governance models in many countries, which mandate separate supervisory and executive boards, as well as governance reforms that have encouraged the split of the CEO and chairman roles. (Japan follows a unique governance model whereby the CEO never holds the joint title.) Another regional difference in governance models is the propensity of companies in some countries to appoint \"apprentice\" CEOs who take the reins while the outgoing CEO serves on the board as chairman, typically at the start of the new CEO's tenure. In North America, 51 percent of the outgoing CEOs in 2007 had been apprenticed, compared with 23 percent in Europe, where the apprentice model is common only in certain countries. Apprentice CEOs generally have worse shareholder performance than other CEOs. One possible reason is that the apprenticeship model undermines the power of the new CEO, limiting his or her ability to formulate a different strategy and effect change. Another possibility is that boards resort to the apprenticeship model when they feel that the pool of candidates from which they must pick is weak. Over the 10 years for which we have data, the annualized, market-adjusted total returns to shareholders for apprenticed CEOs in North America were 2.5 percentage points lower than for non-apprenticed CEOs. The performance gap, however, varies widely from year to year. The outgoing class of 2007 had only a small gap: The apprentices' returns lagged by just 0.4 percentage points. (See Exhibit 5.) The Performance Disconnect Each year, we add new features and analyses to the CEO turnover study. For our latest study, with 10 years' worth of data for the world's largest 2,500 companies, we performed an expanded analysis of the relationship between the total shareholder returns that CEOs produce and their likelihood of being terminated by their boards. Because our annual studies have shown that the rate of CEO dismissals shifted upward from the 1990s to the 2000s at the same time that regulators and shareholders were becoming more activist and many nations were enacting governance reforms and legislation we expected to find evidence that boards were increasingly using stock price as a factor in assessing CEO performance. The data, however, shows only the weakest of correlations. Our basic methodology since we began studying CEO turnover has been to identify the chief executives at each company who left their positions during each calendar year, and to analyze their careers and the stockprice performance of their companies during their entire tenure. In effect, we have provided a look back at each year's \"departing class\" of CEOs, and, in the aggregate, tried to determine factors contributing to the success of some and the failure of others. We have not, in previous years, compared the performance of companies that did not have a CEO succession. This year, we included all 2,500 companies and ran regression analyses for every year to determine which factors might increase the likelihood of a chief executive's continuing in office for a given year, and which might increase the probability of termination. We found that only the poorest shareholder returns increase a chief executive's chance of being dismissed. For all CEOs, we found that the likelihood of being dismissed in a given year was 2.1 percent. The impact of performance was greatest for the CEOs of companies in the lowest decile of shareholder performance those that had experienced an absolute loss of shareholder value over two years of 25 percent or more and that had underperformed their regional industry peers by 45 percent. The likelihood of dismissal for these CEOs was 5.7 percent. (See Exhibit 6.) There is also no evidence that terminations have become more sensitive to performance over time: The likelihood of dismissal for poor performance was no higher in the last several years than it was in the 1990s. The data suggests that the likelihood of being terminated for poor performance does increase modestly with company size. This could be because the biggest companies are subject to greater scrutiny from financial analysts and institutional shareholders. The implication of this analysis is that regardless of the fact that CEOs have been dismissed at a higher rate in the 2000s than in the 1990s, corporate boards are not forcing out CEOs who are delivering substandard performance for shareholders. Boards of directors may, in fact, be too focused on the next quarter's performance, as the critics of \"short-termism\" maintain, but if they are, it is not reflected in the rate at which they are firing chief executives. The Myth of the \"Two-Year Rule\" The data on chief executive tenure also contradicts the contention that the pressure for shortterm stock market performance has resulted in boards dismissing CEOs after two or three years. In the past, we have used mean tenure in our analysis, and mean tenure does show some decrease, from 8.8 years in 1995 to 7.2 years in 2007. But the decrease has been neither precipitous nor consistent. The record low tenure was in 2004 (6.8 years), but mean tenure then bounced back to 7.9 years in 2005 and 8.0 years in 2006. In 2007, the mean tenure was just below the 10-year average of 7.9 years. (See Exhibit 7.) CEOs in North America have the longest average tenure by far 8.3 years in 2007, with a 10-year average of 9.4 years. This is likely due in part to a governance environment that favors the unified CEO-chairman model (and self-preservation), but the average is also affected by the unusually large numbers of North American CEOs who serve for 10 or more years. In the 2007 class of departing CEOs in North America, 33 percent had served for more than 10 years, compared with 18 percent at European companies. We questioned whether the prevalence of unusually long-serving CEOs might be affecting our analysis of tenure, so we recalculated the data using median instead of mean tenure, which minimizes the long tails in the data resulting from the long-serving CEOs. Using median tenure, we found no evidence of global change in tenure over time: The six-year median tenure for CEOs leaving office in 2007 was the same as for those who left in 1995, and the same as the average for the entire 10 years of data. (See Exhibit 8.) Whether the mean of 7.9 years or the median of 6.0 years is used, the data contradicts the conventional wisdom. Boards, however preoccupied they may be with short-term stock price movements, are more patient with their CEOs than is commonly believed, and are in fact giving them plenty of time to prove themselves. Most management studies show that CEOs need three to five years to develop their strategies and see them through to the results. Our data shows that, on average, CEOs are getting that much time, and more. This holds true even for those CEOs who are forced from office. Over the 10 years of our data, the median tenure of dismissed CEOs was 4.5 years, both globally and in Europe; for those dismissed in North America, it was 5.3 years. One reason that boards are acting slowly to replace underperforming CEOs, we hypothesize, may be that many lack a pool of candidates who are ready and able to take over the top spot. This hypothesis is supported by another finding from the CEO turnover study: North American and European boards continue to hire outsiders as CEOs, even though they consistently underperform CEOs who rose through the ranks. For the outgoing CEO class of 2007, 22 percent were outsiders, and over the 10 years of our study, the proportion of outsiders has fluctuated around 20 percent. The performance gap between insiders and outsiders was especially wide for outgoing North American CEOs in 2007. Total shareholder returns for insiders were 3.0 percent above the regionally adjusted market returns per year during their tenure, whereas outsiders' adjusted returns were 1.4 percent lower. In Europe, insiders' returns were 2.8 percent above regionally adjusted market returns, versus 0.7 percent for outsiders. Over the entire 10 years of our study, North American outsiders have underperformed insiders by 1.0 percent on average, whereas the gap for European outsiders was 2.2 percent. (See Exhibit 9.) We also found that outsiders tend to have shorter tenure than insiders: For outgoing CEOs in 2007, the median outsider tenure was 4.8 years, versus 6.4 years for insiders. For the whole 10 years, median outsider tenure was 5.0 years, versus 6.0 years for insiders. Toward Better Succession Planning The data we have presented suggests that although boards of directors have gotten better at managing CEO succession over the past decade, there is significant scope for further improvement. The lack of correlation between CEO performance and dismissal rates, the culture of self-preservation that persists in North American companies, the continued reliance on outsider CEOs they all suggest that companies need to do a better job both of selecting new CEOs and, especially, of developing more future leaders from within. The data also confirms our observations as practitioners: Some companies have simply not created the managerial infrastructure needed for evaluating and nurturing talent, and even well-managed companies often face a CEO succession event without having a viable candidate prepared to take over. Many discussions of succession planning revolve around the concept of developing a \"leadership bench\" wherein a few executives are identified as successors. A more comprehensive approach is to think of a multistep talent development process through which potential future leaders are identified, given wide-ranging experience, and moved up through the organization so that there is always a group of potential chief executives with a variety of capabilities that may be needed when a succession nears. Based both on our research and on experience in advising corporations, we offer some guidance for improving CEO succession policies and procedures, and the talent development processes that support them. Rethink organizational architecture. Management processes, in the context of the right organizational architecture, are key levers in developing future business leaders. The recruiting process should focus on long-term leadership needs. Traditional priorities in organizational design, such as a focus on structural lines and boxes, should be supplemented with the provision of developmental opportunities, such as general management experience. Lateral moves as well as upward moves should be used liberally, with both positioned as promotions. Potential leaders should be kept in jobs long enough to develop mastery and to be held accountable for their decisions. Combine the strengths of insiders and outsiders. The job of the CEO requires the ability both to work within the system and to challenge its underpinnings. Too often, insiders are immersed in the current culture and ideology, are obsessed with execution and operational excellence, and are afraid of change because they see the costs more clearly than the benefits. The most promising potential CEOs are those who can combine the insider's deep knowledge of how the company works with an outsider's ability to sense external change and understand the problems the company faces and the consequences of ignoring them. Build experience. A leadership role in a major corporate change campaign is an exceptional development opportunity for future leaders. These situations deliver the mix of experiences that prepare a candidate for the challenges typically faced by a chief executive, and provide leadership opportunities. The ideal assignments for leadership development are enterprise-wide initiatives that involve rethinking the business in a fundamental way, often triggered by an impending change in the market, such as the entry of a new competitor or a merger among competitors. Such campaigns require redefining the way the company competes and are focused on creating the new capabilities that will be required for success. Prepare for the changeover. The goal of succession planning is to create a bench of qualified candidates from which a successor can be selected, according to the needs of the company at the time. Some typical approaches are problematic. Identifying an heir apparent, for example, restricts your options. Creating a horse race can spur a competition with negative impacts on the organization. As the CEO succession event draws nearer, a cohort of final candidates must be tested for their ability to lead change. Deciding when to replace a chief executive and choosing the successor are among the most important decisions a board of directors must make. The decision will be easiest when the company has a deep pool of potential successors who have been selected for their ability to both understand the company's strengths and see its potential weaknesses, who have been given wide-ranging assignments to round out their experience and expertise, and who have proven their ability to lead an organization successfully. Our studies of CEO succession over the past several years have shown some improvements in the trends in CEO turnover, often resulting from outside pressures for improved oversight and better corporate governance. The next step in improving CEO succession and ultimately in improving financial performance and long-term returns to shareholders seems more likely to come from within, as management teams and boards improve their procedures for identifying and nurturing potential future leaders, and for knowing when the time is ripe for change. A Head Start on Succession by Joseph L. Bower Many firms talk about the importance of their people, but there is little evidence that they're working to develop future chief executives. Says Thomas Neff, chairman of the executive search firm Spencer Stuart U.S., \"Very few organizations have more than one legitimate inside candidate, and an increasing number are caught without anyone properly groomed to take over.\" To begin with, the systems used in most organizations to identify and nurture talent aren't geared toward grooming leaders. Consider what happens in many companies when managers are evaluated. The reviewers examine annual performance. Those managers with disappointing results earn a trip to outplacement. Those with good results earn bonuses and promotions to bigger jobs within the same area, not lateral moves to another function so that they can broaden their skill set. Such executives rarely receive regular mentoring that would help them learn their craft, and, too often, general management responsibility comes late in their career. That means many executives have not had the chance to develop a range of skills as a strategist, change agent, and organization builder. They've never worried about a balance sheet or dealt with bankers, Wall Street, or the government. In companies that are run like this, performance hits a wall as executives run out of costs to cut, and the failure to invest strategically makes the company vulnerable to competitors. By contrast, a company that is trying to build leaders would evaluate the development of the entire business against objectives set at the beginning of the year, and these objectives would include leadership development. But even companies that do invest time and money in leadership development can get into trouble as succession approaches, usually for one of three reasons: the imperial style of the incumbent CEO, rapid growth, or strategic inflection. In the first case, the successful CEO has come to believe in his or her own indispensability and wisdom. Walled off by staff and exclusive offices, these CEOs lose their ability to nurture other great leaders. \"Acorns seldom flourish in the shade of great oaks\" is the way one wise board chairman described the problem. A particularly unhappy version of this story is the insecure CEO who surrounds himself or herself with loyalists rather than talent. Rapid growth is a different succession challenge. Unless the company has invested in the development of its people as well as its business, the scale of a company growing 40 percent a year can outpace the skills of the insiders who might take on the leadership job. Even if an inside candidate seems strong, the board may feel an outsider with experience at a larger company is a better bet. Retired Medtronic CEO Bill George, a strong believer in succession by insiders, says that rapid growth is why he brought in an outsider to succeed him. The company had grown beyond the skills possessed by the inside candidates. The board's biggest concern in this case is that an outsider may well miss the strategic essentials that make the fastgrowing company special. The third succession challenge a company might face is a strategic inflection point, a moment in the life of a business when the fundamentals must change. It's understandable that at such a pivotal time, a board might look outside for its next leader; insiders often fail to grasp the magnitude of the change needed. This is exactly when it is especially valuable to have groomed what I call \"inside outsiders.\" The inside outsider is a person who can see the need for profound change but also knows the company, and especially its people, well enough to drive that change successfully. At General Electric, insider Jack Welch tore up much of his inheritance from Reginald Jones. Now Jeffrey Immelt is making major changes in what he inherited from Welch. A company has to recruit, organize, plan, and invest in ways that teach its most talented people how to lead. Those processes must be a core part of the way the company is managed. Grooming inside outsiders requires moving potential successors to assignments far from headquarters and giving them all sorts of general management opportunities and ownership of critical strategic change efforts. Top executives who understand this use the operations and planning of the company not only to drive growth, but also to develop and test a cohort of leaders. Once the company executives have a record of those leaders' performance over time that can be examined for consistency and sustainability, it is possible for them to look for people who exhibit true leadership traits. In the words of Procter & Gamble's A.G. Lafley, \"Do they put the greater good of the company and the longer-term health of the enterprise and the organization ahead of short-term financial and operational results?\" Companies that invest in a cohort of talent have several candidates to consider when the time comes for leadership to pass to a new generation. For those companies, succession is a celebration. Joseph L. Bower has been a leader in general management at Harvard Business School for 45 years. His latest book is The CEO Within: Why Inside-Outsiders Are the Key to Succession Planning (Harvard Business School Press, 2007). This study identified the world's 2,500 largest public companies, defined by their market capitalization (from Thomson Financial Datastream) on January 1, 2007. To identify the companies among the top 2,500 that had experienced a chief executive succession event, we cross-checked data across a wide variety of printed and electronic sources, including Factiva and Hoover's. Additionally, we conducted electronic searches for announcements of retirements or new appointments of chief executives, presidents, managing directors, and chairmen. For a listing of companies that had been acquired or merged in 2007, we used Bloomberg. Finally, staff within Booz & Company offices worldwide included CEO changes from their regions that had not previously been identified. Each company that appeared to have a CEO change was investigated for confirmation that a change occurred in 2007 and for identification of the outgoing executive: name, title(s) upon accession and succession, starting and ending dates of tenure as chief executive, the announcement date of both appointment and exit, age, whether he or she was an insider or outsider immediately prior to the start of tenure (and, if an outsider, whether he or she was an industry outsider), whether he or she had served as a CEO of a public company elsewhere prior to this tenure, whether the CEO had been chairman (and, if so, for how long), identity of the chairman at the start of the CEO's tenure (if different) and whether that individual had been the CEO of the company, and the true reason for the succession event. Company-provided information was acceptable for each of these data elements except the reason for the succession; an outside press report was used to confirm the reason for an executive's departure. We also enlisted the support of Booz & Company offices worldwide as part of the effort to learn the reason for specific CEO changes in their regions. Regionally adjusted average growth rates (AGRs) of total shareholder returns (TSRs), including the reinvestment of dividends, if any, for each executive's tenure, were calculated. We performed this calculation for the entire tenure, the first and second halves of the tenure, the first two years, and the final year. TSR data for each company and corresponding region was provided by Thomson Financial. Company and regional TSRs for the three years prior to each CEO's start date and calculated AGRs were collected as a measure of the company's health prior to each chief executive's tenure. This year is the 10th data year in our studies of CEO succession. We have 25,000 data points and data on nearly 3,000 CEO successions and more than 500 successions resulting from poor financial or managerial performance. This year, we greatly expanded our shareholder return data to better understand the corporate performance that can shorten a CEO's tenure. For every company and every year, we gathered shareholder return data for the preceding four years. With this data, we can see how the level and duration of poor corporate performance changes the probability that the CEO will be dismissed. We report some of our findings in this article and look forward to presenting additional findings in subsequent articles. Reprint No. 08208 Author Profiles: Per-Ola Karlsson is a vice president with Booz & Company based in Stockholm. He leads the firm's organizational change team in Europe, specializing in strategy-based corporate transformation and postmerger integration services. He has extensive experience in a variety of industries, including automotive and assembly, energy, telecommunications, and transportation, as well as private equity. Gary L. Neilson is a senior vice president with Booz & Company in Chicago. He helps companies diagnose and solve problems associated with strategy implementation, organizational effectiveness, and efficiency. Juan Carlos Webster is a principal with Booz & Company in New York. He specializes in advising boards and senior executives on shareholder value and corporate finance. He has worked across multiple industries on topics including value-based performance management, equity incentive compensation, acquisition support, and operational restructuring strategies. Also contributing to this article were Booz & Company Senior Vice President Steven Wheeler and Principal Adrienne Crowther. May 24, 2011 / Summer 2011 / Issue 63 Strategy & Leadership CEO Succession 2010: The Four Types of CEOs Booz & Company's annual study of turnover among chief executives now increasingly diverse, as the world's largest companies migrate to emerging economies suggests that the nature of the job varies with the role of the corporate core. by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson Illustration by Ross MacDonald Every year, Booz & Company takes a long and penetrating look at CEO succession among the world's top 2,500 public companies. Our research now goes back consecutively to 2000, giving us 11 years of perspective on the tenure and position of these global business leaders. Each year we consider a new dimension in our study of CEO succession. This year, we looked at the role of the CEO and its effect on tenure and turnover. How hands-on are the CEO and his or her senior team? How do they engage themselves with the businesses they lead? We found that these factors have a noticeable effect. The more involved headquarters is in operational decision making in any given company, the more tenuous the CEO's tenure is likely to be. We also found several noteworthy trends this year. There is a steep decline in CEO turnover worldwide: A higher proportion of chief executives are staying in office than we saw in 2009. (See Exhibit 1.) That doesn't mean that governance is growing more relaxed; the rates of CEO turnover are still much higher in general than they were in the 1990s, and the pressure on performance remains as great as ever. But it does suggest that some basic trends in CEO hiring and oversight have solidified as standard practice. Last year, we referred to the 2000s as a \"decade of convergence and compression,\" and this pattern continued in 2010. Around the world, for example, fewer CEOs are also board chairmen this year than was the case the year before, and more CEOs are being appointed from inside companies, rather than from outside. In one respect, however, the largest public companies are becoming more diverse: They are increasingly based in emerging economies, rather than in the mature economies of the United States, Canada, western Europe, and Japan. For years, in compiling our list of the 2,500 largest publicly held companies in the world (as ranked by their market capitalization), we have observed this gradual migration. (See Exhibit 2.) To explore the implications more closely this year, we divided our study sample over the past 11 years into mature and emerging economies (based on the United Nations' Human Development Index for 2010), and then further broke out the BRIC countries (Brazil, Russia, India, and China). We found that the share of companies from emerging markets in our sample has grown at a compound annual growth rate of 14 percent over the past 11 years; BRIC representation has shot up 24 percent annually. China, in particular, shows staggering growth, accounting for one in five new entries in our sample this year (83 of the 415 new members of the world's 2,500 largest companies). For those who see North America and western Europe as the commercial centers of the world, the news is even more striking; for the first time, almost half the companies on the list are located outside those two regions. In fact, the number of the top 2,500 companies based in the U.S., Canada, and western Europe has fallen some 28 percent altogether since 2000. Finally, a significant milestone was reached in 2010: More than one-quarter of the top 2,500 public companies now have their headquarters in emerging economies. Could this suggest that global enterprise is nearing a geographic tipping point? Within a few years, if this pattern continues, the companies in the world's mature Western economies could represent a minority of our sample. Already, the Asian economies (China, Japan, rest of Asia) are the new center of gravity in terms of global market heft, with 895 companies in this year's sample versus North America's 772 companies and Europe's 619 companies. Global Turnover in 2010 This shift in the mix of companies in our global sample is already influencing CEO succession trends, as companies with new governance structures and different growth arcs come to the fore. (See \"A Tipping Point for the Global Economy,\" by Ivan de Souza and Edward Tse, below.) For example, one can surmise that the growing presence of Chinese companies in our sample helped bring down the global rate of CEO turnover this year. Because of their high degree of government ownership, China's biggest companies manifest extremely low CEO turnover half the global average. In 2010, CEO succession worldwide hit a six-year low of 11.6 percent; Chinese companies' turnover was only 5.2 percent. However, the overall drop in turnover in 2010 is not solely China's doing; in general, there was a sharp reduction in both forced and planned turnover at the top. There are several possible reasons for this. First, the global recession's lingering effects influenced companies to keep a steady, seasoned hand at the helm. Second, boards have gotten better at selecting CEOs and ensuring their smooth succession. Finally, given the historically high rates of forced turnover in the last few years, there were fewer companies that hadn't made a recent change in chief executives. Global Governance Trends We broke down the data to assess what it means for today's boards as well as for sitting and aspiring CEOs. Many long-term trends in governance still hold. Boards around the world increasingly separate the roles of chairman and CEO, especially in North America, where only 14 percent of incoming CEOs were assigned both titles in 2010 (versus 52 percent in 2001). Related to this trend is the practice of appointing an outgoing CEO as board chairman, to apprentice the incoming CEO. We continue to see this model growing in prevalence except in Japan, where it has long been the norm (it accounts for more than two-thirds of successions there). Another Japanese tradition, appointing insiders, is also becoming a worldwide phenomenon. Among the 291 succession events we assessed in 2010, insiders ascended to the CEO spot 81 percent of the time. Insiders also last longer in 2010, those insiders leaving office had lasted on average 7.1 years, versus 4.3 years for outsiders. This is not surprising; insiders have historically produced superior returns for their shareholders. Last year was no exception. Insider CEOs leaving office generated total shareholder returns on a regionally adjusted basis of 4.6 percent as compared with 0.1 percent among outsiders. On average, compared with 10 years ago, CEOs are being appointed at a later age. The average appointment age among outgoing CEOs in 2010 was 52.2, versus 50.2 in 2000. This suggests that boards continue to value experience in selecting a CEO. In tracking outgoing CEOs, we found that the percentage of chief executives who had previously served as CEOs of a public company has risen markedly over the past 11 years, from 4.3 percent in 2000 to 15.2 percent in 2010. And in 2010's incoming class, more than half (51 percent) of new outsider CEOs came from within the same industry suggesting that boards are getting more particular about the type of candidates they are seeking. CEOs are also staying in office for less time, compared with 11 years ago. For outgoing CEOs, the mean tenure was 18 months shorter: 6.6 years in 2010 versus 8.1 in 2000. In particular, the length of planned tenures in which the CEO departs on a date that has been prearranged with the board has dropped by 30 percent over the last 11 years, from 10 to seven years. These findings suggest that CEOs are finding the demands of the job more pressing than their predecessors did. Four Models of Management This year we applied an additional lens to our study of CEO succession events at the world's largest companies by examining the impact of the corporate core. The corporate core is made up of the CEO, his or her senior team, and a defined set of support functions necessary for the entire corporation. Back when the senior management team of a typical large company could all have offices in one location, this was known as headquarters. All corporate cores provide leadership, create the context for growth, represent the corporation to the public and investment community, and provide essential services to the business units, which are consigned maximum responsibility for money-making activities. That's where the similarities among companies end. As any CEO can tell you, each corporate core is a unique blend of skills, responsibilities, and personal management styles tailored to the nature of the businesses it oversees and the competitive environment in which it operates. On the basis of our in-depth experience with hundreds of corporations at Booz & Company, we have found that they fall along a spectrum of four different corporate models defined by the way senior management and the corporate core engage with the rest of the business. (See Exhibit 5.) The first model, at one extreme, is the highly diversified holding company distinguished by its arm's-length approach to managing its subsidiary operations. Holding companies add value through strong portfolio management. The second model is the strategic management company, which offers guidance and leadership on strategic direction and provides expectations of performance for its group of related businesses. The third model involves more active management. These corporate cores oversee more tightly linked businesses and advise on operational issues. The fourth corporate model is the highly operationally involved company, in which senior management plays an active role in day-to-day business decision making. To briefly sum up each model from the point of view of a business unit leader: Holding companies want your results. Strategic management headquarters want to know what you will do. Active management corporate cores want to know how you will do it. And operationally involved executive teams want to work closely with you in running the business. As part of our research on CEO succession and related issues, we have interviewed chief executives working within these models. Their experience sheds light on the operation of these models, the patterns of CEO succession that seem to follow the models, and the implications for business leaders. Holding companies (Model 1) manage their businesses much as a financial fund manager oversees a portfolio of investments. The CEOs of this first group of companies have a minimal degree of involvement in operational decisions. They are primarily interested in results, not in how the results are generated. The corporate core establishes and ensures managerial and financial discipline. Holding company chief executives are a level removed they focus on portfolio management while the second-tier executives run the businesses. If there is a problem, more often than not, its fallout is felt at that second management tier. Warren Buffett, CEO of Berkshire Hathaway Inc., typifies this type of management. As he noted in his letter to shareholders in the 2010 annual report, \"At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years...and call me when they wish. And their wishes do differ. There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A 'hire well, manage little' code suits both them and me.\" Strategic management companies (Model 2) exercise a bit more oversight in managing their operations. The corporate core offers strategic guidance to its local businesses, but not the supervision of operational decision making. A good example is the Korea-based LG Corporation, a US$104 billion company originally known for its brand name Goldstar. (LG once stood for Lucky Goldstar.) At first glance, because of its global operations spanning consumer electronics, mobile communications, home appliances, chemicals, and more, LG might seem to fit the definition of a diversified holding company such as Berkshire Hathaway. But Juno Cho, president and CEO of LG Corporation, notes that the company's corporate core has always operated more in a strategic management model. Cho describes his role, and that of other senior management, as closely engaged in strategic goal development with executives of subsidiaries such as LG Chemical and LG Electronics, where central core team members often sit on the boards. \"We effectively agree on strategic goals and targets with the businesses and give them accountability,\" says Cho. Once each year the group chairman of LG Corporation conducts a consensus meeting with the presidents of all the business units to discuss, understand, and agree on their annual business plan. \"This is the backbone of o